Power And Pleasure

Sitting in his glass-walled corner office on the 34th floor of Manhattan's
IBM
building, Raj Rajaratnam marveled at his own success. It was Thursday, Oct. 15, 2009, and on his huge curved desk nearly a dozen outsize computer screens tracked every movement in markets around the world. A pudgy man, prone to spasms of self-preening, Rajaratnam was feeling great. Many hedge fund rivals and friends from Greenwich, Conn. were finished, casualties of government probes or the recession. But, after blistering losses in 2008, his Galleon Group of funds were on track to earn 20% in performance fees, the lucrative payments that had helped make him a billionaire. Gregarious, as gracious to clients and friends as he was demanding to those who worked for him, Rajaratnam controlled 130 employees and $7 billion in assets at the peak. "I am the last man standing," he boasted to a visitor that day. "I want to double in size over the next five years."

He was busy expanding his public profile, too. A film in which he was a minority investor--Today's Special, starring Aasif Mandvi, the comic correspondent on The Daily Show, and featuring actress and cookbook writer Madhur Jaffrey--was making its debut in London. Rajaratnam was set to fly out the next day for the premiere and spend the weekend.

He never made the flight. At 6 a.m. Friday morning he was rousted by federal marshals who burst into his apartment on tony Sutton Place. They arrested him on charges of masterminding the biggest insider trading ring since the late 1980s, when prosecutors unraveled a network that toppled Michael Milken (Milken ultimately served time for securities fraud but not insider trading.) and Ivan Boesky. Word that Rajaratnam had bought a plane ticket for London together with a call to his daughter around 3 a.m. Friday morning had convinced the feds that the Sri Lankan-born hedge fund king was set to flee. The phone call turned out to be an innocent father-daughter exchange. Rajaratnam, a diabetic, was not allowed to eat breakfast but was handcuffed and rushed downtown, where he told associates he was held without food or drink for a couple of hours. (Through his spokesman, Rajaratnam now says he was given a bagel and water.)

A bagel and water: Rousted at 6 a.m., Rajaratnam was booked downtown.

Back at Galleon's headquarters, it seemed a normal Friday. When Rajaratnam didn't show at the morning meeting, traders were told that he was traveling. Then "we looked up at the flat screens above the trading desk, and there was Raj doing the perp walk," says a trader. "To my knowledge, that is how everyone in the firm found out" he had been arrested.

Today Rajaratnam has lost a lot of weight--and shed much of his net worth: $1.5 billion a year ago, down to an estimated $700 million or less today. (Rajaratnam disputes the number.) Now 53, he is free on $100 million bail. He has pleaded not guilty to 13 counts of conspiracy and securities fraud, insisting that he used a "mosaic" of information to decide what stocks to invest in--not, as the feds allege, relying on tips from corporate insiders. This month he will appear in court to argue that prosecutors improperly sought to conduct wiretap surveillance of him. His trial starts in early 2011.

A man of Falstaffian appetites and a craving for power, Rajaratnam enjoyed throwing flamboyant parties to show he was a big shot and to indulge his network of associates, who, the feds allege, passed along insider information. He hobnobbed with industry bigwigs, playing Fantasy Football with the likes of Paul Tudor Jones.

He seemed to have a knack for gaming the system. In 2000, when he submitted plans to combine two apartments at Sutton Place, he told city officials he needed two kitchens for religious reasons. Typically only one kitchen per unit is allowed. The reason cited in his application was "adherence to Jewish traditions," says Ryan FitzGibbon, a New York City buildings department spokeswoman. (Rajaratnam disputes this.)

Rajaratnam was a big name on the charity circuit, using Galleon's clout from paying fat trading commissions to draw Wall Streeters to his pet causes. In January 2005, 1,000 people packed New York's Stone Rose Lounge for a fundraiser for tsunami victims. Rajaratnam likened Sri Lanka's fishermen to hedge fund managers. "Every morning they go out to sea and try and catch as many fish as they can. And every night, just like hedge fund managers, they come back to port and eat what they catch."

The man could certainly party. In August 2007, for his 50th birthday, he chartered a plane and flew 70 friends, family members and alleged informants--referred to as the "Raj Tribe"--to a safari in Kenya. (Guests received T-shirts that read, "The Riotous, Rowdy, Rebellious Raj Tribe.") Among them: Anil Kumar, the McKinsey senior partner who pleaded guilty to supplying inside information to Rajaratnam, and his wife, Mala; and Ali Far, an ex-Galleon employee also charged in connection with the ring, and his wife, Pantea. For five days guests went on game drives to see lions, hippos and other wildlife, breakfasted on the Mara plains and partied at night.

Some celebrations were rowdier. That same summer Rajaratnam hosted another birthday bash, renting a large boat around Manhattan. Under the light summer sky Galleon analysts and traders mingled with other guests on the upper and lower decks. One somewhat mysterious partyer, a well-coiffed blonde who kept changing from one low-cut slinky dress into another, took to the dance floor alone. She turned out to be Danielle Chiesi, a consultant to a Bear Stearns hedge fund, who the government alleges supplied information to Rajaratnam and others. (Arrested the same morning as Rajaratnam, Chiesi has pleaded not guilty to charges of conspiracy and securities fraud.) While guests danced on the lower deck Rajaratnam and some of his close associates smoked marijuana on the upper deck, say two former employees. At one point the captain told the revelers to stop. Rajaratnam and his guests balked, says an employee, citing how much money they were paying for the boat. But they quit after the captain threatened to dock the boat. Rajaratnam denies he smoked pot, and notes he helped the boat's crew in getting some guests to stop smoking. He attributes any disparaging comments to disgruntled former employees and colleagues.

One year, during a trip to Atlantic City hosted by Salomon Smith Barney, Rajaratnam joined in a game of strip poker being played at the back of the bus, recall two former employees. As wine flowed freely, people started taking off clothes until the men were in their boxers and the women were topless, except for their bras; Rajaratnam, say these sources, shed only his shirt. (He denies playing strip poker; Salomon Smith Barney declines comment.)

Rajaratnam began on Wall Street in 1983, one of a few in Chase Manhattan Bank's coveted credit training program. Even in a rarefied group, Rajaratnam stood out and was known as "HP Raj" because he didn't need a
Hewlett-Packard
calculator to do complex computations in his head. When the program ended he joined the electronics group.

In those days, colleagues recall, Rajaratnam, earning $34,000, seemed humble and deferential. Once, when he was late for a meeting, he refused to overtake a car driven by an older Chase technical advisor. Quizzed about it, Rajaratnam said he felt it would have shown a lack of respect. While he thrived at Chase, colleagues sensed his passions lay elsewhere. "Give me a Quotron," he quipped, referring to the stock quote machines once ubiquitous on Wall Street trading floors. In the mid-1980s Rajaratnam quit to become an analyst at Needham & Co., a small, scrappy investment bank specializing in technology and health care.

Slim and dashing then, Rajaratnam beguiled colleagues and clients with larger-than-life tales. "He would tell about his experience with the Tamil Tigers," recalls Gerald Fleming, referring to the violent separatist group in Sri Lanka. Fleming, who covered chip equipment makers at Needham, remembers a trade group conference in Monterey, Calif. where Rajaratnam captivated dinner mates with a tale of how "he went into training with [the Tigers] and one day a bullet whizzed past his ear, and that's when he decided to go and study in England." If Rajaratnam said as much, it may have been embellishment, since the Tigers were formed long after he left Sri Lanka. Rajaratnam denies any ties to Sri Lankan insurgents. But in a civil suit plaintiffs allege that Rajaratnam and his father funneled millions of dollars to the Liberation Tigers of Tamil Eelam through a nonprofit the U.S. Treasury shut down in 2007. Rajaratnam moved to dismiss the suit. But in August a federal judge in New Jersey said some claims could proceed if the plaintiffs could overcome a jurisdictional hurdle.

Rajaratnam thrived in Needham's hardscrabble culture. He wanted to prove he was "king of the world," says Lisa Lettieri, who worked as a sales assistant at Needham in the mid-1980s and described Rajaratnam as "a rainmaker. He had to be on a beautiful woman's arm all the time. He wanted lots of [money]. It was money and women."

His arrival on Wall Street coincided with the migration of South Asians to Silicon Valley. "Raj sort of had a South Asian mafia," says Fleming. "There were people he could call and ask and get for a number of companies the earnings to a penny." Fleming recalls sitting in Rajaratnam's office when he logged a call to
Advanced Micro Devices
. Later, his secretary came in and said someone with an Indian-sounding name returned the call, Fleming says. Rajaratnam took the call, walked onto the trading floor and announced the profit figure. "And he was right," says Fleming, astonished at the time.

He seemed ever eager for an edge. "He was always kind of pressing you for information," says James Bagley, who met Rajaratnam in the early 1990s as president at
Applied Materials
, a Santa Clara, Calif. maker of chip-manufacturing tools. Bagley says Rajaratnam would quiz him about customers and other companies, but he declined to answer. Often, Bagley says, Rajaratnam gave him a nugget and then "would want you to confirm it." Several times, particularly after he moved to Galleon, Rajaratnam tried to swap information with him, but Bagley says, "I didn't want to have anything to do with him. All he wanted to do was to learn something about whether to buy my stock in the short term or sell it." When the feds alleged that Rajaratnam had an insider at
Intel
, Bagley says, "I was not shocked. To the contrary, I thought, 'Gee, that was not surprising.'"

In 1992 Rajaratnam started Needham Emerging Growth Partners, a hedge fund for newly enriched tech executives to invest their wealth. Some money managers were vexed about the conflicting hats he wore: as an analyst pitching stock ideas to them and as an investor making money potentially at their expense. In 1996, amid growing tensions at Needham, he quit to start his own hedge fund. When Theodore O'Neill, a semiconductor analyst, moved into Rajaratnam's office, he found a trove of contacts. Along one wall were drawers with spiral-bound call logs of inbound calls from tech executives all over Silicon Valley. "I thought, 'Huh, how do I get these guys to call me?'" recalls O'Neill.

At its peak Galleon was paying more than $200 million in trading commissions each year. Still, Rajaratnam insisted his group travel economy class, unless flying to Europe, and set price limits on a bottle of wine at a business meal. Once, he blew up at an underling because the font size on the daily profit-and-loss report was too small. (Rajaratnam says his expense policy is standard; he denies the flare-up over fonts.) His outbursts so rattled his lieutenant Tom Fernandez that his hands shook when Rajaratnam lost it. Galleon insiders used to say their boss was in one of his "gorilla" moods.

As his funds prospered, Rajaratnam's colleagues marveled at his uncannily savvy stock picks. If he took a large position in a stock, funds run by Galleon managers often followed his lead. (Rajaratnam says portfolio managers made their own decisions.) Sometimes, as with
ATI Technologies
, Galleon funds and its "risk management" book--which took positions to offset other holdings as a way of managing the firm's overall risk--placed bullish bets on the stock, suggesting an unusually high degree of conviction about the company.

In its case prosecutors allege that in 2006 McKinsey's Kumar kept Rajaratnam in the loop as acquisition talks between Advanced Micro Devices, a McKinsey client, and ATI heated up. Galleon, the government charges, amassed ATI stock. On July 24, when AMD unveiled its deal, Galleon dumped its position, netting a profit of at least $19 million. (Rajaratnam denies he received and traded on any material nonpublic information.)

Rajaratnam used to marvel how an outsider like himself had succeeded so thoroughly as an insider. The feds are pretty sure they know just how.